Technical Market Report

By: Mike Burk | Sun, Dec 18, 2005
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The good news is:
 • The market is oversold as we approach one of the seasonally strongest periods of the year.

Short term

The chart below shows the NASDAQ composite (OTC) in red along with momentum of 3 oscillators derived from NASDAQ breadth data. It covers the period from mid April through last Friday and vertical dashed lines are drawn on the 1st trading day of each month; the horizontal dashed line represents neutral for the momentum indicators. The thick solid line across the bottom third of the chart is drawn at the current level of the indicators.

Oscillators have min-max limits and, no matter how persistent the trend they will regress to 0. Momentum indicators applied to oscillators smooth and exaggerate the behavior of the oscillators.

The oscillators underlying these indicators are calculated from advancing issues - declining issues (AD), new highs - new lows (HL) and upside volume - downside volume (UD).

The indicators are as low as they have been at any time since the April lows and every rally from these levels has been good for several percentage points.

The major indices rarely move more than 3 days in a direction opposite the trend. That is, if the trend is up there will be few if any periods of 3 or more down days. A period of more than 3 consecutive days opposite the trend usually indicates a change of trend.

The chart below shows the OTC in red and an indicator that plots the percentage of the previous 3 days that have been up. For the indicator to touch the top of the screen each of the previous 3 trading days must have been up and for the indicator to touch the bottom of the screen, each of the previous 3 trading days must have been down. The chart covers the period from late July (showing the early August high) through last Friday.

The mid October low occurred on the 3rd consecutive down day and there was another period of 3 consecutive down days in late October. The late October occurrence was the last until last Friday. Prior to the 3 consecutive down days ending last Friday the index was up for 3 consecutive days. Friday's low as higher than the previous low 6 days earlier.

The chart below shows the OTC in red and an indicator showing the average daily percentage change in the index over the preceding 10 trading days (absolute value of the change on down days is used for the calculation). What is notable is the current value of 0.2% equals the previous low in late June and you must go back to March of 1995 to find the indicator at that low a level. Mid December like mid June is a seasonally weak period and rather than the index falling, volatility just dried up for a while.

Intermediate term

The NASDAQ new low indicator (OTC NL) is a 10% trend (19 day EMA) of NASDAQ new lows plotted on an inverted Y axis so increasing new lows move the indicator downward and decreasing new lows move the indicator upward (up is good). After two consecutive down weeks the indicator has only turned slightly downward.

The small caps usually lead both up and down.

The chart below shows Accutrack (AT) (a FastTrack relative strength indicator) in black comparing the Russell 2000 (R2K) and the S&P 500 (SPX) in black along with the OTC in red. The chart covers the period from mid April through last Friday.

During the past week the indicator fell sharply indicating the secondaries underperformed the blue chips. The secondaries performance during this entire rally has been unimpressive compared to the rally of the April low suggesting the end of the cycle that began last April is approaching.

Seasonality

Seasonally there are several ways to view the coming week.

Two of them are:

  1. The week following options and futures expiration.
  2. The week before Christmas.

Options expiration was not a factor prior to the mid 1980's. Since the mid 1980's during the 1st year of the Presidential Cycle, the week following options and futures expiration in December has been nearly always up. The only exception was 1989 when the SPX was down 0.76% for the week, the OTC was up 0.19% that same week. Additionally, Monday and Tuesday have usually been down while Wednesday, Thursday and Friday have usually been up.

Calculating the week before Christmas over the long term presents some additional problems because prior to 1952 the market traded 6 days a week. So I have excluded data prior to 1952. Day of week presents another difficulty. This year the last trading day before Christmas is a Friday. During the 1st year of the Presidential Cycle, that was also the case in 1961, 1977 and 1989. Over all years the week before Christmas is usually up, however, during the 1st year of the Presidential Cycle the average return has been negative for both the OTC and SPX. The OTC has been up 40% of the time while the SPX has been up 54% of the time.

Report for the week following options and futures expiration during December. The number following the year is it's position in the presidential cycle. Daily returns from Monday to Friday.

OTC Presidential Year 1
Year Mon Tue Wed Thur Fri Totals
1965-1 -1.05% 0.49% 0.63% 0.03% 0.00% 2.20%
 
1969-1 0.46% 0.03% 0.42% 0.00% 0.51% 0.58%
1973-1 0.56% 0.00% 1.71% 1.18% 0.47% 3.92%
1977-1 -0.72% 0.77% 0.52% 0.37% 0.51% 0.10%
1981-1 -0.29% 0.37% 0.10% 0.13% 0.00% 0.63%
1985-1 0.12% 0.38% 0.00% 0.02% 0.77% 0.48%
Avg 0.02% 0.37% 0.43% 0.41% 0.56% 0.85%
 
1989-1 -1.76% 0.39% 0.60% 0.95% 0.79% 0.19%
1993-1 0.31% 0.59% 0.06% 0.35% 0.00% 0.12%
1997-1 1.73% 1.45% 0.69% 0.00% 0.79% 0.38%
2001-1 -1.85% 0.00% 0.83% 0.80% 0.55% 0.33%
Avg -0.39% 0.81% 0.20% 0.70% 0.71% 0.26%
 
OTC summary for Presidential Year 1 1965 - 2001
Avg -0.25% 0.55% 0.21% 0.46% 0.63% 0.31%
Win% 50% 13% 56% 75% 100% 70%
 
OTC summary for all years 1963 - 2004
Avg -0.18% 0.05% 0.13% 0.32% 0.59% 0.56%
Win% 48% 46% 66% 72% 83% 74%
 
SPX Presidential Year 1
Year Mon Tue Wed Thur Fri Totals
1929-1 -1.41% 0.64% 0.00% 2.21% 0.10% 1.34%
1933-1 -1.21% 0.20% 1.85% 0.21% 0.00% 3.47%
1937-1 1.43% 0.62% 1.76% 0.54% 0.00% 0.24%
1941-1 -0.94% 0.24% 0.12% 0.00% 0.36% 0.70%
1945-1 0.00% 0.00% 1.40% 0.75% 0.17% 0.82%
Avg -0.53% 0.20% 0.52% 0.18% 0.15% 0.45%
 
1949-1 -0.30% 0.36% 0.24% 0.91% 0.00% 0.01%
1953-1 -0.36% 0.76% 0.28% 0.45% 0.00% 0.96%
1957-1 -0.50% 0.10% 0.00% 1.01% 0.35% 0.26%
1961-1 -0.35% 0.70% 0.20% 0.37% 0.07% 1.54%
1965-1 -0.73% 0.39% 0.30% 0.11% 0.00% 0.14%
Avg -0.45% 0.27% 0.10% 0.38% 0.14% 0.47%
 
1969-1 -0.70% 0.39% 1.05% 0.00% 0.78% 0.75%
1973-1 0.01% 0.00% 3.06% 2.09% 0.20% 4.95%
1977-1 -0.76% 0.20% 0.59% 0.81% 0.95% 1.38%
1981-1 -0.22% 0.37% 0.46% 0.19% 0.00% 0.87%
1985-1 0.51% 0.69% 0.00% 0.25% 0.94% 1.01%
Avg -0.23% 0.41% 1.06% 0.83% 0.62% 1.45%
 
1989-1 -1.84% 0.36% 0.11% 0.57% 0.77% 0.76%
1993-1 0.68% 0.12% 0.43% 0.01% 0.00% 1.01%
1997-1 1.80% 1.53% 0.68% 0.00% 0.40% 0.00%
2001-1 -1.11% 0.00% 0.41% 0.68% 0.34% 0.31%
Avg -0.12% 0.67% 0.07% 0.42% 0.50% 0.14%
 
SPX summary Presidential year 1 1929 - 2001
Avg -0.33% 0.26% 0.13% 0.45% 0.34% 0.17%
Win% 28% 25% 56% 69% 75% 53%
 
SPX summary for all years 1928 - 2004
Avg -0.20% 0.04% 0.06% 0.17% 0.27% 0.20%
Win% 39% 45% 57% 64% 70% 56%
 
*****************************************
 
5 days before Christmas.
The number following the year represents its position in the presidential cycle.
The number following the daily return represents the day of the week;
1 = Monday, 2 = Tuesday etc.
 

Break down by presidential years

 
OTC Presidential Year 1
Year Day5 Day4 Day3 Day2 Day1 Totals
1965-1 -0.07% 5 0.00% 1 -0.49% 2 -0.63% 3 -0.03% 4 -1.23%
1969-1 -0.66% 4 1.28% 5 0.33% 1 0.03% 2 -0.42% 3 0.56%
1973-1 1.60% 2 -0.35% 3 0.03% 4 -0.83% 5 -0.95% 1 -0.50%
1977-1 -0.72% 1 -0.77% 2 0.52% 3 0.37% 4 0.51% 5 -0.10%
1981-1 0.67% 5 -0.32% 1 -0.37% 2 -0.10% 3 0.13% 4 0.00%
Avg 0.17% -0.04% 0.00% -0.23% -0.15% -0.25%
 
1985-1 -0.24% 3 0.06% 4 0.14% 5 -0.48% 1 -0.38% 2 -0.89%
1989-1 -1.76% 1 -0.39% 2 0.60% 3 0.95% 4 0.79% 5 0.19%
1993-1 0.49% 5 0.12% 1 -0.59% 2 0.06% 3 0.35% 4 0.42%
1997-1 -1.56% 4 0.10% 5 0.49% 1 -1.45% 2 -0.69% 3 -3.12%
2001-1 0.87% 2 -1.09% 3 -3.25% 4 1.42% 5 -0.07% 1 -2.11%
Avg -0.44% -0.24% -0.52% 0.10% 0.00% -1.10%
 
OTC summary for all Presidential year 1 1965 - 2001
Averages -0.14% -0.14% -0.26% -0.07% -0.08% -0.68%
%Winners 40% 40% 60% 50% 40% 40%
MDD 12/20/2001 4.30% -- 12/24/1997 3.10% -- 12/19/1989 2.14%
 
OTC summary for alll years 1963 - 2004
Averages 0.13% -0.02% -0.11% 0.25% 0.33% 0.59%
%Winners 57% 46% 55% 67% 64% 60%
 
 
SPX Presidential Year 1
Year Day5 Day4 Day3 Day2 Day1 Totals
1953-1 0.20% 5 -0.16% 1 -0.76% 2 -0.28% 3 0.45% 4 -0.56%
1957-1 -0.10% 3 1.07% 4 -0.80% 5 0.00% 1 0.10% 2 0.26%
1961-1 -0.35% 1 -0.70% 2 -0.20% 3 -0.37% 4 0.07% 5 -1.54%
 
1965-1 -0.04% 5 -0.47% 1 0.39% 2 0.30% 3 -0.11% 4 0.08%
1969-1 1.58% 4 0.85% 5 -0.88% 1 -0.39% 2 1.05% 3 2.22%
1973-1 2.15% 2 0.08% 3 -0.28% 4 -1.07% 5 -0.68% 1 0.19%
1977-1 -0.76% 1 -0.20% 2 0.59% 3 0.81% 4 0.95% 5 1.38%
1981-1 0.71% 5 -0.53% 1 -0.37% 2 -0.46% 3 0.19% 4 -0.47%
Avg 0.73% -0.05% -0.11% -0.16% 0.28% 0.68%
 
1985-1 -0.40% 3 0.10% 4 0.44% 5 -1.12% 1 -0.69% 2 -1.67%
1989-1 -1.84% 1 -0.36% 2 0.11% 3 0.57% 4 0.77% 5 -0.76%
1993-1 0.66% 5 -0.11% 1 -0.12% 2 0.43% 3 0.01% 4 0.87%
1997-1 -1.06% 4 -0.89% 5 0.73% 1 -1.53% 2 -0.68% 3 -3.43%
2001-1 0.75% 2 0.58% 3 -0.84% 4 0.44% 5 -0.02% 1 0.91%
Avg -0.38% -0.14% 0.06% -0.24% -0.12% -0.82%
 
SPX summary for Presidential year 1 1953 - 2001
Averages 0.12% -0.06% -0.15% -0.21% 0.11% -0.19%
%Winners 46% 38% 38% 38% 62% 54%
MDD 12/24/1997 3.40% -- 12/19/1989 2.19% -- 12/24/1973 2.02%
 
SPX summary for all years 1952 - 2004
Averages 0.16% 0.03% 0.08% -0.04% 0.28% 0.49%
% Winners 52% 40% 55% 46% 69% 68%

Conclusion

Many of the momentum type indicators are at or near their lows for the year suggesting there is little downside potential remaining and a snap upward could occur any time soon. Seasonally the week following options and futures expiration turns positive on Wednesday.

I expect the major indices to be higher on Friday December 23 than they were on Friday December 16.

Last week the major indices were mixed with the large cap indices up slightly and the small cap indices down slightly so I am calling last weeks negative forecast a tie.

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Author: Mike Burk

Mike Burk

Mike Burk independently publishes a weekly newsletter on the stock market from a technical perspective.

Charts and figures presented herein are believed to be reliable but we cannot attest to their accuracy. Recent (last 10-15 yrs.) data has been supplied by CSI (csidata.com), FastTrack (fasttrack.net), Quotes Plus (qp2.com) and the Wall Street Journal (wsj.com). Historical data is from Barron's and ISI price books. The views expressed are provided for information purposes only and should not be construed in any way as investment advice. Furthermore, the opinions expressed may change without notice.

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